Despite oil’s decline, energy companies win with equity offerings

A natural gas flare on an oil well pad burns as the sun sets outside Watford City, North Dakota January 21, 2016. Persistent low oil prices have lead to slower business in much of North Dakota's Bakken oil fields. The collapse of U.S. oil and gas investment could have...
REUTERS/Andrew Cullen

NEW YORK More than a dozen companies in the hard-hit exploration and production energy industry have announced new share offerings this year – and have generally been rewarded in the stock market for the strategy.

Although it might seem that companies would upset their investor base by diluting earnings per share when they added more stock, most of the 15 companies that have done so have actually outperformed their peers.

Their share prices have beaten an oil and gas producers index, on average, by about 3 percentage points since their respective offerings, and the outperformance is even stronger when compared with that of the broader S&P energy sector.

With widespread worries about energy companies collapsing under debt loads, analysts and investors said that shareholders could more easily stomach the dilution of their holdings if it means adding cash to strengthen balance sheets.

The stronger companies in the industry were generally those able to raise capital through share sales, analysts said, and the recent successes did not necessarily mean a flood of further offerings would follow.

“The companies that are doing it are good solid companies,” said Mike Breard, an energy stock analyst at Hodges Capital Management in Dallas. "If your fund has been out of energy for two years, these are the stocks you look at first."

Hodges Capital owns shares of Diamondback Energy Inc (FANG.O), which said on Jan. 13 it was raising $226 million through a stock offering to repay the debt under a revolving credit facility, with the rest for exploration, development activities and other purposes.

Since then, Diamondback’s shares have climbed 31 percent against a 19 percent rise for the SIG Oil Exploration & Production index .EPX.

Despite "mixed emotion" about the offering because it did dilute the stock, Breard pointed to the "safety" provided by the funding given that oil was only about $30 a barrel at the time, about $10 cheaper than it is now, making the climate more uncertain.

"Under the conditions that existed then, you’d rather own 90 percent of a company with a stronger balance sheet than 100 percent of one with a slightly worse balance sheet," Breard said.

Oasis Petroleum Inc (OAS.N), Callon Petroleum Co (CPE.N) and PDC Energy Inc (PDCE.O) have also outperformed the oil producers index by more than 10 percentage points since their respective offerings. Cabot Oil & Gas (COG.N) has lagged the most, underperforming by more than 30 percentage points.

All told, U.S. exploration and production companies have raised more than $10 billion through equity offerings this year, analysts at Capital One Securities estimate.

Companies including Pioneer Natural Resources Co (PXD.N), Synergy Resources Corp (SYRG.A), PDC Energy and Callon did not urgently need cash but stood to “immunize” their balance sheets in case the oil markets are ugly into 2017, said Irene Haas, exploration and production analyst at Wunderlich Securities in Houston.

Matador Resources (MTDR.N) and Energen (EGN.N) have asset sales pending, but the newly raised money means they do not have to worry about timing of proceeds, Haas said.

“People would rather they have money in their pocket and survive,” Haas said. “They’ll worry about dilution later.”

Investors who gobbled up shares during offerings in January and February may have called a bottom in oil prices, which have rebounded 50 percent since mid-February.

While plenty of oil companies want to offer shares, "I would guess we’ve seen most of the low-hanging fruit that’s been picked," said Christian Ledoux, senior portfolio manager at South Texas Money Management in San Antonio.

Ledoux said he doubts many more will follow, "not because (the companies) don’t want to, but because they won’t be able to attract investors" until oil prices are much higher.

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